Setting up a nonprofit is a fulfilling feat. However, nonprofits aren’t free from legal risks that can threaten their operations or even lead to their dissolution.
In a perfect world, anyone can set up nonprofit organizations and support the causes they believe in smoothly and with no problems. Unfortunately, reality doesn’t work that way. Regardless of how beautiful their causes are, nonprofit organizations – much like their for-profit counterparts – are still susceptible to legal risks. This is why it’s highly advisable for those intending to start nonprofits to consult with a nonprofit law firm before doing so.
Whether you’re a founder or a member of the board, it’s important to acknowledge and develop action plans to manage or avoid any legal risks that the organization may face.
Consulting with a Nonprofit Law Firm
Consulting with a law firm that specializes in nonprofits is a definite must especially before you even start your nonprofit in the first place. Not only do law firms help prepare you to manage the legal risks your organization may face, but they help you avoid these risks so your organization doesn’t have to face them at all.
When choosing a law firm to consult, it’s best to go with one with a good track record – one that’s already worked with and supported big and small charities, philanthropists, and social entrepreneurs.
Top Legal Risks Facing Nonprofit Organizations
Losing One’s Federal Tax-Exempt Status
Gaining federal tax-exempt status is a huge feat for a nonprofit organization. Undergoing the process of applying to the IRS alone is a daunting, tedious task. Getting approval is a whole different story.
Being tax-exempt means that one’s nonprofit is relieved of a lot of federal and state corporate income tax liabilities. In exchange of this, however, the organization is expected to comply with numerous federal tax laws and the restrictions they have on tax-exempt organizations. The restrictions focus mainly on an organization’s fundraising methods, income, certification, and other activities. Non-compliance can cause the organization to incur heavy penalties. In more severe cases, it could mean the retraction of their tax-exempt status.
Avoiding these legal risks is as easy as having a basic understanding of these federal laws and restrictions and consulting with a nonprofit law firm to come up with policies and action plans to ensure compliance.
Violating Copyright and Trademark Laws
Every nonprofit organization faces the risk of violating copyright and trademark laws. This could mean two things: nonprofit staff members accidentally or unknowingly using other people’s work for the organization’s promotional or marketing efforts or the organization failing to protect the organization’s work (including names, logos, artistic expressions, etc.) with the proper copyright and trademark laws.
As a founder or board member, one has to have the understanding of these laws to implement company policies that prevent staff from using other people’s work in violation of copyright and trademark laws. The appropriate measures should also be taken to protect the organization’s own work. This could mean registering trademarks and copyrights for certain artistic expressions. The process may be tedious and sometimes costly, but it’s definitely worth it!
Not Being Able to Manage Conflicts of Interest
Nonprofit organizations are strictly being monitored for any hints of conflicts of interest. This is because signs of which could mean that the founders or board members could be abusing their organization’s tax-exempt status or even be harboring the organization’s income for personal gain.
This is a legal risk that your nonprofit law firm wouldn’t forget warning you about as this could potentially put your organization at the center of a public media scandal.
A conflict of interest can come from the personal or financial interests of members being in conflict with the organization’s operations and vision and mission. For instance, if an organization supports dental health of children in rural areas and the nonprofit manager’s spouse is a dentist whose business can potentially benefit from the organization’s mission. There is a conflict of interest here that can affect the manager’s thought process or ways of managing the organization.
A conflict of interest policy and a policy for identifying, disclosing, and managing any conflicts would help avoid running into this legal risk.
Unknowingly Violating Laws via Social Media
Practically all organizations – for-profit or non-profit – expose their work and operations via social media. They use social media to connect with people and to advertise their products and services.
With this new innovation comes new risks. One could potentially violate a ton of laws from just posting on social media. Copyright infringement is a fairly common violation among normal social media users. But when organizations violate these laws, things could get ugly.
The people running the organization – the founders, board members, staff members, etc. – and their actions are tied to the organization especially if they identify themselves as employees via social media. Whether they like it or not, their actions will reflect on the organization. Should any of these people “misbehave” on social media, the nonprofit may be held liable for defamation or tortious interference. A nonprofit law firm would then be needed to address these cases.
A clear social media policy to explain how employees should present themselves on social media, especially if they publicly associate themselves with the organization, would aid in lessening any unwanted social media accidents.
Ignoring Employee Dissatisfaction
Many founders and board members fail to realize that employee or volunteer dissatisfaction can open up doors for legal risks, too. Workplace bullying is, unfortunately, commonplace. However, there are laws that protect employees and volunteers from experiencing this.
If an organization’s employees or volunteers are vocal about their dissatisfaction, it’d be a good idea to listen to them and find the root cause of this. If workplace bullying is found as the culprit, it could put employers at risk of being legally responsible for intentional infliction of emotional distress. In more serious cases, they can subject to assault charges.
Implementing a no-bullying policy and a set-up that allows employees to complain freely will not only help reduce instances of bullying in the workplace, it will also make the workplace feel like a safer space in general.